Self-Regulatory Organizations; Delta Government Options Corp.; Order Approving Proposed Rule Change Modifying Exercise Settlement Date and Buy-In Procedures

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34381; File No. SR-DGOC-93-04]

Self-Regulatory Organizations; Delta Government Options Corp.;

Order Approving Proposed Rule Change Modifying Exercise Settlement Date

and Buy-In Procedures

July 14, 1994.

On December 27, 1993, Delta Government Options Corp. (``DGOC'')

filed a proposed rule change (File No. SR-DGOC-94-04) with the

Securities and Exchange Commission (``Commission'') pursuant to Section

19(b) of the Securities Exchange Act of 1934 (``Act'').\1\ On February

16, 1994, and on March 4, 1994, DGOC submitted substantive amendments

to the filing.\2\ Notice of the proposal was published in the Federal

Register on May 25, 1994, to solicit comments from interested

persons.\3\ No comments were received. This order approves the

proposal.

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\1\15 U.S.C. 78s(b) (1988).

\2\Amendment No. 2 completely superseded all previous

submissions filed in connection with the proposed rule change, File

No. SR-DGOC-93-04.

\3\Securities Exchange Act Release No. 34083 (May 18, 1994), 59

FR 27087.

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I. Description of the Proposal

The proposed rule change modifies DGOC's exercise settlement

procedures. Under current practice, the exercise settlement date,

depending on certain factors, occurs from two to five business days

following the expiration date or the date on which an exercise notice

is tendered. For an option contract on a Treasury bond or a Treasury

note exercised on a day preceding the expiration date, the exercise

settlement date is the next business day following the day on which the

exercise notice is properly assigned to a participant. The proposal

makes no change to this provision of DGOC's rules. For an option

contract on a Treasury bond or a Treasury note exercised on the

expiration date, the exercise settlement date will now be the next

business day following the expiration date for those contracts.

Currently, the exercise settlement date for such contracts is the third

business day following the expiration date. Also, under the proposed

rule change, for an option contract on a Treasury bill, the exercise

settlement date will be the next business day after an exercise notice

is properly tendered. Currently, the exercise settlement date is

Thursday of the week in which the exercise notice is properly tendered.

In connection with the modifications to the exercise settlement

date, DGOC has amended Section 1005 of its Procedures to provide that

DGOC will allocate exercise settlement obligations prior to 8:00 a.m.

on the business day prior to the exercise settlement date. Previously,

DGOC allocated exercise settlement obligations on the second business

day prior to the exercise settlement date.

DGOC also has amended Section 1102 of its Procedures to clarify its

buy-in process applicable when a participant fails to make a required

delivery of Treasury securities to DGOC. First, upon the request of the

participant failing to deliver and with good cause shown, DGOC is now

authorized to defer the execution of a buy-in if Delta has reason to

believe that the delivery default will be cured on that other

arrangement adequate to protect Delta's interests have been made.\4\

Previously, DGOC could defer the execution of a buy-in for no more than

twenty-four hours from the time delivery was due. Second, the timing

for the execution of a buy-in has been set forth with specificity.

Under the more specific procedures, DGOC may transmit a notice of buy-

in to the participant which failed to deliver after the elapse of

thirty calendar days after the failure to deliver. DGOC must deliver in

duplicate a written notice of buy-in no later than 12:00 noon five

business days before the proposed execution date of the buy-in. The

amended section also sets forth the information DGOC must supply to the

participant in the buy-in notice.

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\4\Section 1102 of DGOC's Procedures authorizes DGOC to buy-in

Treasury securities for the account and liability of a participant

that fails to fulfill its delivery obligation.

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II. Discussion

The Commission believes that the proposal is consistent with the

Act and particularly with Section 17A of the Act.\5\ Sections 17A(b)(3)

(A) and (F) of the Act\6\ require that the rules of clearing agencies

be designed to promote the prompt and accurate clearance and to assure

the safeguarding of funds which are under the custody or control of a

clearing agency or for which it is responsible and to foster

cooperation and coordination with persons engaged in the clearance and

settlement of securities transactions.

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\5\15 U.S.C. 78q-1 (1988).

\6\15 U.S.C. 78-1(b)(3) (A) and (F) (1988).

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One purpose of the proposal is to respond to participants who have

requested that DGOC's settlement procedures more closely follow the

practices already established in the over-the-counter (``OTC'')

marketplace for the settlement of purchases and sales of Treasury

securities and for the settlement of exercised options on such

securities. by shortening DGOC's settlement periods to conform to the

industry standards, DGOC will reduce the amount of time such settlement

obligations remain outstanding which in turn will reduce credit

exposure to DGOC as well as generally in the settling of options on

Government securities. DGOC's use of the same settlement period as is

used in settlement of similar OTC options will help to ensure a

consistent approach among clearing entities and should serve as a

platform for additional coordination among clearing entities clearing

identical or complimentary securities.

Because DGOC's current settlement period of two to five business

days is longer than the settlement period for similar OTC products

cleared outside of DGOC, DGOC-issued options carry a price adjustment

for the additional financing costs. As a result, the price of DGOC-

issued options does not match exactly those of similar OTC-traded

options. Implementation of DGOC's revised settlement procedures will

make the relative values of DGOC-issued options comparable to those of

OTC-traded options and will eliminate participants' need to make the

additional calculations necessary to correlate the price of DGOC-issued

options with the price of OTC-traded options. Therefore, this proposal

should provide participants greater ease in trading and exercising

options issued by DGOC. The proposal also should result in more options

on Government securities being cleared and settled through the

automated facilities of DGOC, a registered clearing agency which

participates in the national system for the clearance and settlement of

securities transactions. These are options transactions that otherwise

would be cleared through decentralized and labor intensive processes.

In connection with the shorter settlement time frames, the rule

change enables DGOC to allocate exercise settlement obligations prior

to 8:00 a.m. on the day prior to settlement and, as noted above,

permits accelerated settlement time frames that are more consistent

with settlement of exercised options and settlement of securities in

the cash market. These changes should help DGOC to promote the prompt

and accurate clearance and settlement of securities transactions and

should foster cooperation and coordination by persons engaged in the

clearance and settlement of securities transactions. The proposal also

clarifies DGOC's buy-in procedures while providing DGOC with more

flexibility concerning buy-ins. The Commission believes that these

changes improve DGOC's ability to deal with the risks associated with

the failure of a participant to fulfill its delivery obligation. By

doing so, the modified buy-in procedures better enables DGOC to fulfill

its statutory obligations to safeguard securities and funds within its

possession or control for which it is responsible.

III. Conclusion

For the reasons discussed above, the Commission believes that the

proposal is consistent with the requirements of the Act, particularly

Section 17A of the Act, and the rules and regulations thereunder.

It is therefore ordered, pursuant to Section 19(b)(2) of the

Act,\7\ that the above-mentioned proposed rule change (File No. SR-

DGOC-93-04) be, and hereby is, approved.

\7\15 U.S.C. 78s(b) (1988).

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For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\8\

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\8\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-17710 Filed 7-20-94; 8:45 am]

BILLING CODE 8010-01-M